A deep dive into the direct sales legalization debate

[Pluto]

Hi guys, I wanted to understand what reasoning could be used for all these direct sales bills that fail to even make it to the floor for a vote (Connecticut, New Mexico, Wisconsin, Oklahoma, New York, and Nebraska makes six of seven bills this year alone). So I was reading through a hearing (January 30, 2018) on a Nebraska direct sales bill where testimony was taken from each side. Here was the introduction from Tesla's representative on the bill:

Thank you. Good afternoon. Chairman Friesen and members of the committee, thank you for the privilege of speaking before you today in support of LB830. My name is Daniel Witt [...] and I'm the senior manager of business development and policy for Tesla. For those of you who aren't familiar with our company, we're an American manufacturer of electric vehicles and, more recently, solar and battery storage solutions. Our vehicles have been honored with the Motor Trend Car of the Year, NHTSA's highest ever score for safety, and our company has been rated the highest in consumer satisfaction by Consumer Reports for the last three years running.

Our latest vehicle, the Tesla Model 3, has an MSRP of $35,000, and a range of 315 miles. With a wait list of roughly 450,000 globally, many of whom are Nebraskans, we've also announced plans to bring to the market an electric semi truck capable of carrying 80,000 loads for up to 500 miles on a single charge.

In Nebraska we've already invested millions of dollars in EV infrastructure in Sidney, Ogallala, Gothenburg, Grand Island, and Lincoln. But we are here in support of LB830 today because we're currently blocked by statute from investing more in the state. Tesla has never had any franchise dealers anywhere in the U.S. or globally. Instead Tesla has always sought to sell its vehicles directly to consumers, primarily because our cars are predominantly made to order and our stores are equal-parts education centers to inform our customers of the benefits of electric drive and energy-efficient practices. We are in support of LB830 because it provides businesses with the option of choosing its own destiny.

Indeed, we're not the only ones who would be impacted by this legislation. It's designed theoretically to also apply to companies such as Waymo, Lucid Motors, Zoox, or any other start-up in its infancy that the committee or I have yet to hear about. It would not apply to GM or subbrands like Genesis from Hyundai or companies that previously used dealers, like Fisker, that have since gone out of business. As such, LB830 is not a threat to dealer interests in Nebraska, and I want to be especially clear about this point: Tesla is not here today to overturn the franchise system. Where we have advocated for these types of changes, we have similarly not been in the business of trying to shut down local businesses.

Indeed, Tesla has operated, in a majority of the United States, for ten years without a single manufacturer following in its footsteps or, more importantly, without the loss of a single dealership attributed to its presence in the state. In truth, Nebraska's law is currently more restrictive than those in communist China or socialist countries in Europe. Tesla has been allowed to invest and grow in those places, unimpeded, for years. And just to provide one further detail which Senator Vargas touched upon, it's worth noting that in the largest car market in the United States, manufacturers of any size can receive a sales license for any facility just ten miles away from their closest franchisee. Not a single location today is owned by a manufacturer in that state. The reason for all this is because manufacturers have been...these manufacturers made a choice some time ago about their method of distribution. We are simply asking Nebraska to afford us the same opportunity.

The current system compels us to operate in a certain fashion that provides no additional benefits to the consumer. Indeed, allowing us to operate in the state will provide consumers with more choices, increase competition and investment opportunities for this state. You are likely to hear that there is ample interest from dealers around the state to represent our brand. However, none of these businesses--and due respect to the many, very profitable and illustrious owners in the state--they've yet to provide Tesla with a business model that demonstrates that it can provide a no-profit service model, like the one we currently afford our customers, without compensating by raising the cost of the car to consumers. This would not only put our company at a disadvantage in the open market, but artificially also...also artificially raises the cost for consumers.

Finally, I'd point out that we've been asked by the opposition if we would just set up shop in Council Bluffs. I ask you if this is the will of the Nebraska Legislature. If so, I can guarantee that we will do exactly this, not out of any kind of spite for the state or for this body, but simply in order to fulfill the obligation to provide the best possible experience for our growing list of customers in the state. And what then? Do not the same terrible scenarios that have been put forward by the opposition exist just simply across from the Missouri River?

The laws that Nebraska has put in place do serve a purpose and are sensible. However, their intention was never to block innovation or job creation from new companies entering a free market. To that end, we have sought the opportunity to compromise with the dealers on any language that would make them feel more comfortable, such that they would accept our business model and we could coexist. This has been done repeatedly in several other states. That offer remains open today, and I truly hope the committee will urge them to seek such a compromise. Thank you for your time today, and I would be happy to answer any questions.

Eventually a question was asked of Daniel Witt about how the bill would create a duality in the auto industry, with different cost structures and a possible unfair advantage (since the Nebraska bill would've only allowed newcomers to have a direct sales approach). I was surprised to hear a compelling argument to answer this which I somehow never connected the dots in my mind, notably the first two paragraphs here:

So [...] I think of the crux of this being a little bit differently than setting up two different tiers, and I alluded to this in my testimony. But I fundamentally believe that every business...businesses make thousands of choices along their pathway to success or failure. Choosing their method of distribution to a customer is one of those decisions. Some of these automakers have grown to have illustrious businesses by virtue of partnering with dealers here in the United States. GM produces 10 million cars a year for the U.S. market. They've constantly reaffirmed their partnership with dealers...no objection there.

They sell 10 million cars. Their inventory is taken off their hands immediately and landed on a dealer lot somewhere; it makes perfect sense. Our business is fundamentally different, which is why we're seeking the option to make the same...have the same right to that decision. And just because it takes a different tack and moves us into a different method doesn't mean that we weren't playing by the same rules; it means we were afforded the same opportunity.

I would submit to you that our presence...our business was fundamentally changed when we were able to purchase the former NUMMI factory in California which, for decades, was the largest manufacturing facility in the United States. For those of you who aren't aware, that closed down in 2008, as a result of the tremendous recession that we all faced. GM went into bankruptcy and offloaded their interest, and Toyota had moved their truck manufacturing to Texas. And so 4,000 people lost their job. We've been able to resurrect that facility and now have 10,000 people working in the city of Fremont and at that facility.

But that's a facility which, frankly, we're capped at about 500,000 vehicles. That's more than what NUMMI, which was the joint collaboration, was pushing out of there. They were at a rate of about 463,000 vehicles per year. We think that we can get up a touch higher, but that's our capacity globally. We don't have any other factories, so when we talk about being a different business model, we mean it in very real terms. We don't have the capacity to build 10 million cars. We don't have the capacity to build 6 million cars, like Ford. We may hope to grow to that capacity in the coming years, and that will be by virtue of, essentially, our ability to, via competition, compel customers over to our technology and to our vehicles. But that is the American way.

That is how we hope to expand. And if, by the way, we reach 6 million cars or 10 million cars, and we are blessed to have the same sorts of problems that GM has, I'm sure there are many economists that would suggest to us that the dealer model would make more sense. I think...we're not opposed to having discussions and, in fact, you may hear today from testimony that we have engaged in discussions with dealers directly, in order to try and explain our position. We're not...we will not ever shut the door on a conversation. It is just a matter of deciding when it makes the most sense. And then to your earlier question, and Senator Vargas's answer, it's probably very speculative, even for me, to suggest at what level of success that that would make sense.

He later clarifies how Tesla would be regulated and elaborates why Tesla believes the dealership model is the wrong decision for them:

So I actually believe the intent of the bill is to not create a new regulatory structure; it's to place us in the existing regulatory structure. We agree that the existing regulatory structure makes a great deal of sense. It provides consumer protections. There's basic levels for overlapping on federal standards for safety. These are all good things which we are not privy to being regulated by presently. So we are asking the motor vehicle board to provide us a sales license, such that we provide them the credentials according to financing and a number of other factors associated with the application process, such that we, too, can essentially play by the same rules. That's the closest answer I can give.

As it relates to why we have a different business model in the first place, fundamentally--and Senator Bostelman, I believe you asked this question earlier in terms of what the process is like--our customers--and there's actually a couple people here that can testify to own experience--but our customers, more often than not, would kick the tires in a store location, go home and do their research, ultimately place a deposit for a vehicle on-line, provide their credit card information at that point. That secures them a place on the manufacturing line.

Closer to the date of manufacturing, they're...they are notified that they must complete their customization of the vehicle. At that point, they customize their vehicle to the nth degree: what kind of leather, paint color, so on and so forth, type of battery. And then the car is produced to that end. The consumer, in that case, has done all of the work associated with the purchase of the car, and the transaction for the entirety of the car occurs at that point.

Asking us to utilize a dealer, in that case, creates the scenario by which the car has been destined for a specific individual from the very beginning, and then we're going to ship to a dealer lot where rightly, if it were to take some presence on a dealer lot, they would...might seek compensation for that, only to have it essentially be an intermediary step before the end customer, who already customized the vehicle, essentially comes to pick it up. That's a profit area that we just...we just don't think makes sense for us right now.

And again, we've had conversations with dealers. We're happy to have more conversations with dealers, but we've...when I say that the...we have the different business model, that's essentially what it comes down to. It really is based in, essentially, extracting the smallest profit possible on our side of the business in order to sustain and grow our business, while keeping us in direct competition with other cars that are in the marketplace right now. And it's a very sensitive market, especially as you come down in market into the mass market level where our current car, the Model 3, is at.

Last, I've included a beautiful testimony in support of Tesla as an automaker pursuing this business model:

[M]y name is Cliff [and] I live in [...] Nebraska. We do real estate development all across Nebraska and Kansas and, recently, some solar development across the state. Several years ago, my wife suggested that she would like to have an electric car, so we went out and started the process of looking for an electric car.

The obvious choice, to me, seemed to be the Chevy Volt. It was designed to give me some electric use, but then it had extended range because of the motor. I went to get in a Chevy Volt, and I simply didn't fit. Tried the Cadillac ELR and had exactly the same problem. I knew I would fit in a Prius, but the plug-in Prius was only available in California so I couldn't buy it. I looked at a Nissan Leaf, I fit in the Leaf, it worked great, but the mileage was so short I literally couldn't go from my hometown to the next community and back; it was a urban vehicle.

So finally we decided we'd make the trip to Denver and look for a Tesla. Drove out, looked at the Model S, and fell in love with the car. There were a lot of things we liked about the car, but one of the biggest factors was the fact that it's the safest car ever produced. And when we're talking about consumer protection, it's nonsensical to say that we're keeping people out of the safest car ever made in order...as a matter of consumer protection.

We bought the car, brought it home, had a few small issues along the way. The Texas...the Tesla Rangers took care of us. We called them up; pretty soon we got a call from them. They called up, gave us their cell phone so we had 24-hour access to them. And they were just wonderful to take care of. Less than...a little while later, my wife said: "Can you explain to me why we only have one electric car? We've got three cars--two gas cars and one electric. Why don't we have two electric and one gas?" and I didn't have an answer for that, so we got in the car, went back out to Denver and bought a Tesla Model X. So now we drive two electric cars and we have one gas car.

We ordered our Model X, and two years, five months, and ten days later, we got it. And I think that shows one of the problems that we have here. The truth of the matter is Tesla doesn't need dealers. The last thing they need is someone out there selling cars that they can't produce. They're producing...they're selling cars faster than they can make them in their factory right now. When you watch the Super Bowl this weekend, you will see advertisements from Chevy, you will see advertisements from Ford. You won't see any advertisements from Tesla; they just simply don't need that. And the cars need almost no service. You don't change the oil on them. The brakes last forever because you really don't use the brakes much because the electronics do a lot of the braking. So that's part of the problem that we have here, is that they really don't need the dealership organizations the way other cars do.

Now the downside of that is if I needed a car today, and I wasn't able to wait two years for that car, I have to go to a dealer, because that's what I would have to do to get a car delivered right away. If I have time, then I can wait for the other cars. But I think the point is, as consumers we need choices. I need a car that I fit in. I like the idea of putting my wife and my daughter in the safest cars made, and right now those are Teslas, and any other cars haven't been produced that match up with that.

One other thing I would like to talk about briefly, because no one else here has mentioned it, is I've been doing work with the public power through the solar stuff, and I am a big public power advocate. And public power right now has been doing a lot of things to save us money by reducing the amount of electricity we use. They give us incentives to put in LED bulbs, they give us incentives to put in higher-efficiency heating and air conditioning systems in our home and, in many cases, they've actually reduced the electric load that they have. They need new load, and they're recognizing that electric cars provide a new load for them that really works out well, and it makes a lot of sense for them. But if we're going to promote that load for public power, we're going to have to promote the distribution system of charges across the state.

We've been doing some of that. We've made our charger available. We're doing a new office building. We're putting in both a Tesla charger for ourselves and another charger for people who don't have a Tesla, but have a different electric car. Senator Friesen, you probably noticed Aurora just put in electric chargers at the Edgerton Center. Many of the motels and other businesses across the state have been putting in chargers. The Nebraska Community Energy Alliance has been putting chargers in cities all across the state. A portion of the VW settlement is likely to go into electric car chargers across the state. But the truth of the matter is the group that's been leading the charge, the group that's put the most amount of money into putting electric chargers and promoting electric cars across the state is Tesla. They've done far more to promote that than anyone else.

I realize that they're asking us to do something unique, to carve out something different for them. But we're asking them the same thing. We're saying, "You need to operate differently in Nebraska than you operate in any other state in the union or in China or in Poland or Norway or wherever," and I think the people that are really getting hurt by that are Nebraska consumers, by having our choices limited. So I'm hoping that the Legislature can find a solution to that. I commend Senator Vargas for his attempts to bring something to the table, and I hope that there is a solution that can be made that will provide Nebraska consumers with a full choice of potential vehicles. Thank you.

Overall I found the fear of adopting this bill was that direct sales could provide an unfair advantage over the dealership model in terms of having different regulatory structures. There was fear from dealerships that this change would lead to a later change to allow all manufacturers to open competing factory stores. There also seemed to be a lot of sentiment for dealerships and the existing model given that there are almost 8000 dealerships in Nebraska and only around 30 Tesla stores in California. Because dealerships are spread throughout the state even in rural towns/places, the dealership model is viewed as a good thing for consumers because it means service is guaranteed and provided at a reasonably close distance, regardless of any manufacturer business decisions (ie. when GM attempted to shut down some locations during bankruptcy).

In closing, Senator Vargas who sponsored the bill reiterated that they were willing to compromise the changes or clarify/strengthen protections. He also highlighted how most of the concerns don't apply to Tesla at least and referenced how these fears aren't playing out in other states with direct sales legalized.

Supporting arguments came from 4 entrepreneurs and/or Tesla owners. Opposing arguments came from 4 people involved in the dealership industry, a representative from the Alliance of Automobile Manufacturers, and a representative from the Nebraska Chamber of Commerce. In case if anyone wanted to read the full transcript for this hearing (which seemed to touch on almost everything), you can find it on pages 8-60: https://nebraskalegislature.gov/FloorDocs/105/PDF/Transcripts/Transportation/2018-01-30.pdf.

 

[Sprandt23]

Thanks for sharing all that great info. The debate has been ongoing in Missouri for several years as well. Currently Tesla IS allowed to sell in the state thanks to a ruling in early 2017 - however there is some renewed push back from the MADA....they are looking for the ability to sue the Mo Department of Revenue saying Tesla shouldn't allowed to be licensed.

Here is the latest article from this spring....
Auto dealers renew fight against Tesla in Jefferson City